Stock Quotes in this Article: FUEL, AGIO

DELAFIELD, Wis. (Stockpickr) -- Lots of people freak out whenever markets are dropping like they are right now -- but not me. I get ridiculously excited!

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The reason I get excited when markets are getting hit hard by the bears is that when your trading screens are a sea of red, it's very easy to identify strong names that aren't being hit in the overall market weakness. These strong names are displaying relative strength, which is simply a measure of how strong a stock is compared with the overall market. The thinking here is that if the bears can't take a stock down when they're in full control of the markets, then that stock has potentially exhausted its sellers and the buyers are in control.

Wall Street has conditioned traders and investors to buy stocks that are going down during big market corrections. That strategy is not a wise one, unless the stock has found a bottom and has finished its downtrend. If you buy a stock that's displaying relative weakness in market drops, then you're going to get caught trying to catch a falling knife. A better way to approach market corrections is look for the stocks that aren't going down and are displaying relative strength. These names are often setting up to be the next big movers and for good reason: They have buyers.

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A perfect example of this can be seen in the performance of Agios Pharmaceuticals (AGIO) today, which is soaring higher by 24% to over $44 a share. On Friday, as the market was hammered lower, shares of AGIO actually closed higher at $35.48, back above the stock's 50-day moving average of $35.03 and well above its intraday low of $31.42 a share. Now, to be fair, AGIO had big news today after the company reported that its blood cancer drug, AG-221, showed promising clinical activity. That said, it still wasn't going down on Friday, which was a signal that the stock had real buyers.

Other stocks hitting my scans that aren't going down on this solidly red day include American Apparel (APP), Acorda Therapeutics (ACOR), Sarepta Therapeutics (SRPT), Questcor Pharmaceuticals (QCOR) and J.C. Penney (JCP). All of these stocks are displaying relative strength intraday, so traders should now keep a close eye on how they close to see if the bulls remain in charge.

One stock that's really jumping out at me here that's displaying relative strength during this market weakness is Rocket Fuel (FUEL), a technology company that provides artificial-intelligence digital advertising solutions. Shares of FUEL are up about 1.7% on the day with volume that's tracking in pretty strong, since over 580,000 shares have traded vs. its three-month average volume of 683,332 shares.


Part of the reason that Rocket Fuel is moving higher today is due to the fact that BMO Capital upgraded the stock to outperform from market perform based on valuation. The firm said its price target of $58 a share will remain. That being said, I love this upgrade for a much better reason, which is the fact that shares of FUEL might be putting in a bottom here from a technical perspective.

If you take a glance at the chart for FUEL, you'll notice that this stock has been absolutely crushed over the last two months and change, with shares plunging lower from its high of $71.24 to its recent low of $38.12 a share. During that crash, shares of FUEL have been mostly making lower highs and lower lows, which is bearish technical price action. To put that drop into perspective, shares of FUEL have plunged over 30% over the last three months. That's a serious drop and anyone who has held the stock through that decline is in some serious pain.

One group that is very happy with the recent performance for FUEL is the short-sellers. The current short interest as a percentage of the float for FUEL is extremely high at 24.4%. That means that out of the 13.53 million shares in the tradable float, 3.31 million shares are sold short by the bears. This is a huge short interest on a stock with very low float.

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I am normally not a big fan of brokerage upgrades or downgrades, but I like this call by BMO Capital for one major reason: the developing technical setup for FUEL. Shares of FUEL are potentially putting in a double bottom here at $37.81 to $38.12 a share. That $37.81 level is from last November and that $38.12 level is the intraday low the stock hit on Friday. If these levels hold as major support, then shares of FUEL could be an absolutely steal at current prices for the longer-term and a great trading play in the short-term.

Traders should now look for long-biased trades in FUEL as long as its trending above those double bottom support zones at $38.12 to $37.81 a share and then once it breaks out above some near-term overhead resistance levels at $42.50 to $45 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average action of 683,332 shares. If that breakout triggers soon, then FUEL could easily bounce sharply higher and tag its 50-day moving average of $51.07 a share to even $55 a share.

Considering the low float and higher short interest combined with the potential double bottom for shares of FUEL, the bears might want to really consider covering their positions unless they can break the stock back below those double bottom support levels. If the bears can break the stock below the double bottom levels with volume, then all bets are off the bulls. However, a large short-squeeze rebound trade looks more likely to me considering how oversold the stock is and the fact it's displaying some relative strength today.

-- Written by Roberto Pedone in Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.